The premise for this newsletter isn’t original: there are numerous books, podcasts, and movies that point to various places in the world that organize things in different ways than we do in the US. Here, I’m not going for cheap laughs (comparing French school lunches to US fare) or easy moralizing (parental leave in the Nordic countries). Instead, I’ll point to four areas where we in the US might learn from the Germans, but in each case, there’s an asterisk: the German model is vulnerable in some way, so none of these is presented as a silver bullet. There is precedent: the German state retirement system, with its retirement age of 65, was a key influence on Franklin Roosevelt at the dawn of Social Security. What else is there to learn from?
1) German cars
Germany’s auto industry, dating back to Karl Benz’s 1886 patent, predates everyone else’s, and its leading brands still set the standard for a particular combination of precision, luxury, performance, and social prestige. Whether in profit margins, motorsports results, or resale value, German automakers have set the standard for well over a century. Some of this leadership appears to be uniquely German: when Daimler Benz owned Chrysler and the latter built vehicles designed by the former, the aforementioned qualities did not translate. Get into a Mercedes blindfolded then into a Lexus or Cadillac, and there are numerous cues that cannot be copied: the seat cushioning, the sound of the door closing, the interior noise level all give the imitators away. The same used to be true of the often-imitated BMW 3-Series: it was the driver-focused benchmark that everyone from GM to Nissan to Audi tried to copy. And it always defied imitation; it appears that only internal marketing-driven design changes could knock the 3-Series off its engineering-earned podium.
Given that every automaker in the world has been studying German automakers under various microscopes, it seems unlikely that anyone could challenge their leadership, but the age of internal combustion is coming to an end. Electric vehicles are under development by everyone in the industry, and the success criteria for those are still unclear. It does appear that every automaker outside of Tesla has underestimated the role of software (whether for user experience, battery management, or driver automation), the Germans included. Perhaps more of a threat comes from the bicycle, and specifically the e-bike, as a more sensible solution to urban mobility. At the 150th birthday of Benz’s invention, there is no guarantee German automobiles will still be the world standard - especially if dashboard menus still look as though they were designed by SAP.
2) Sports team ownership
I just learned this in the last week: German football teams are partially owned by clubs — essentially by local fans — in a unique structure. 50% of shares plus 1 share are held by the club, preventing wealthy owners from running the clubs in ways that conflict with fans’ interests. Profit is not the main priority, and the result is that German football is characterized by high-quality play, reasonable ticket prices, and organizational stability. (Germany also has four World Cup wins, second only to Brazil’s five, three of which included Pele.) US-based sport franchise owners and Russian billionaires have bought clubs in England, which has no such rule, and fans are revolting. In the US, only one professional sports club is owned by the fans (answer below), and league rules expressly forbid this structure from ever being replicated.
As the short-lived attempt to form a European Super League illustrated however, the German model may not be sustainable (it was only implemented in 1998). For one thing, German player salaries are lower than what clubs in other countries can pay. Secondly, investment in the health of the club often requires outside investment, so if a partial owner sustains involvement in the club for 20 years, they can be allowed to acquire a controlling interest. This clause is beginning to take effect at several clubs. Either way, the 50% + 1 model may not survive the next decade. (Trivia answer: the Green Bay Packers)
3) Beer
In 1516, Duke Wilhelm IV decreed that all beer brewed in the state of Bavaria must contain only three ingredients: water, barley, and hops (yeast hadn’t been discovered yet). It remained codified in German law until 1987, when it had to be modified as part of membership in the European Union. A new German law took effect in 1993, but many brewers still adhere to the Reinheitsgebot. The decree doesn’t have the effect one might think it does: such staples as wheat beer and most darks can’t be brewed in strict accordance with the law.
The 1980s were a time of major change in beer brewing worldwide: Jimmy Carter deregulated home brewing in 1979, then the three west-coast US states all allowed brewpubs in 1982 and 1983. Lots of brewpubs were launched by some of those home brewers, and 2/3 of the 1500 US breweries as of 2010 launched as brewpubs. Craft beers have established a substantial foothold in Germany, bringing the westward migration of German, Czech, and Belgian beer-loving immigrants full circle as a US trend is now reshaping alcohol consumption in Europe.
Part of the German appeal of craft brewing is the same rebellion against mass-produced characterless beer that has taken hold in the US, where craft is approaching 20% of the market. In Germany, the #2 brewer is Anheuser-Busch InBev: Beck’s, Franziskaner, Hasseröder, Löwenbräu, and Spaten are owned by the Belgian-based multinational. The #1 German beer maker, Radeberger Gruppe, exports very little to the US. As we will see in bullet 4), global consolidation is challenging many tenets of German economics and culture.
4) Mittelstand
Germany’s heavy reliance on mid-sized firms is well known even though the term and its definition are unclear. According to an Economics Minister who helped nurture the sector, the concept is “much more of an ethos and a fundamental disposition of how one acts and behaves in society" than a statistical or legal designation. These mid-sized firms can rightfully be called the backbone of the German economy, employing 60% of the workforce and contributing heavily to the nation’s favorable trade balance by exporting everything from orthopedic devices (Otto Bock) to electronic transducers (Sennheiser). Given such a powerful auto industry, it’s not surprising that Germany’s machine-tool sector is the best in the world.
But the Mittelstand is under siege from several directions. Bureaucracies, regulations, and passivity (especially in later generations of a family-run company) can contribute to a lack of innovation. The quest for global scale means that increasing productive output, entering more and more geographic markets, and reinventing the market offering take on more urgency. AKG, a mid-sized Austrian headphone/microphone company, is now owned by Samsung, for example: the “tweeners” markets, never easy, get more pressure applied by global giants every year. Finally, according to at least one investment bank, German mid-sized companies have been slow to embrace digital transformation. One reason for this may be a shortage of skilled labor, a common complaint in most economies. All of these factors should temper any excessive optimism about some magical properties of mid-sized companies.
The US used to have a similar sector: Magnavox made TVs, Schwinn made bicycles, and Bass made shoes, all on native soil. The advent of container shipping, a strong dollar, incredible inflation in health-care costs, and a handful of other factors drove much of the US manufacturing base offshore. Remnants remain: upholstered furniture, metal fabrication (think trailers and RVs), bookbinding. Otherwise, most US manufacturing relates to cars, high technology, aerospace/defense, and chemicals and refining. All of these tend to be capital-intensive, increasingly high-skilled, and rich in intellectual property. Each of these factors makes it difficult for a mid-sized firm to thrive while staying mid-sized. Germany is different, for certain, but the Mittelstand cannot be immune from global competitive forces in perpetuity.
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Where does all this leave us? As President Biden attempts to drive foundational change in the social and economic fabric, there is much to learn from countries where inheritance taxes, universal pre-kindergarten, and wide environmental responsibility are already in place. With any policy at any level, there will always be unexpected consequences and the more we learn from countries like Germany — about what to emulate and what to avoid — the better those new policy outcomes can be.
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